Optimal decisions under price dynamics for Roth conversions

Abstract

Retirees are faced with a variety of choices during their working and retirement years on how to best support their retirement lifestyle and estate planning goals. One of these choices is the option to convert a portion of their pretax savings from a tax‐deferred account (TDA) into a tax‐exempt Roth account. In this article, we quantify the Roth conversion payoff and when/how it depends on investment returns. We show that, while the use of taxable account assets may produce a larger payoff than early withdrawals from the Roth IRA, large unrealized taxable account gains and estate plans may change this calculus. Our work provides a recommendation on how current dividends or cash versus appreciated assets should be used to optimize Roth conversion payoffs, and informs FinTech companies and robo‐advisors on how to best support this important option for millions of current and future retirees.